Monday, August 13, 2012

Indo-European Relations: Strategic Alliances

Kanwal SibalMember Advisory Board, VIF

To appreciate better the subject of India’s defence relations with
Europe some reflections of a general nature would be pertinent. The
point needs to be made right at the start that India does not have
defence relations with Europe as such; it has them with individual
European countries. Europe has forged a strong economic personality in
the form of the European Union, but it has failed to develop a common
foreign and defense policy in the true sense. When it comes to economic
issues India, like other countries, has to deal with Brussels.

In foreign affairs Europe has acquired some role as an interlocutor
through the High Representative of the Union for Foreign Affairs and
Security Policy, with India holding a regular dialogue with the EU as a
dialogue partner. But in defence relations India deals, not with
Brussels, but with individual capitals.

It also needs to be pointed out that even though the EU exists as a
shared economic space protected by common external tariffs, individual
European countries commercially compete with each other intensely in
foreign markets. In the defence area such competition is even more
spirited as the overall cake is much smaller, the opportunity to win
sizable contracts is not many, the contracts are generally high-valued
and the margins are considerable. Also, the contracts create a long term
relationship, with provision of spare parts, training, overhauling,
periodic upgrades, modernization etc. providing plentiful returns.

Defence ties, besides, have a political element that comercial
exchanges do not have. Countries with serious political differences,
including the potential of conflict, can have flourishing economic ties,
as is the case between US and China or Japan and China, not to mention
political differences between Russia and Europe not standing in the way
of their close energy ties. In such cases defence ties are excluded
because that pre-supposes a degree of geo-political understanding
beforehand.

Such ties also give the country that sells arms a degree of political
leverage over the recipient country because the latter becomes
dependent on the former for its defence preparedness. The danger is
always there that at a critical moment spare parts may not be released
or needed ordnance may not be available because of imposition of
sanctions or the existence of a conflict situation. All these aspects
are very relevant to India’s defence ties with European and other
countries.

India’s defence relations with European countries have reflected,
over the years, India’s foreign policy choices, its adherence to the
policy of non-alignment during the Cold War and the impact of the Cold
war on our region with Pakistan deciding to join western military pacts
and receiving military aid from the West. The position taken by European
countries and others on India-Pakistan differences, especially on
J&K, that taken by individual European countries on sanctions
imposed on India because of India-Pakistan hostilities or the degree of
reticence in selling arms in order to avoid sharpening tensions in a
region seen as unstable. India’s nuclear and missile programmes have
also had a bearing on the policies of European countries with regard to
transfer of sensitive or dual use technologies barred under the
technology denial regimes set up by the West.

Not many countries, even in Europe, manufacture advanced defence
systems that can be sold in the international market. Defence
manufacturing is a high-cost enterprise as very advanced technologies
are involved, which, in turn, require huge outlays on R&D for
development. The need to export in order has some economies of scale and
amortizes development costs is therefore a pressing one. All the more
so because in the absence of any real external threat European countries
have had to reduce their defence budgets and the size of their standing
armed forces, with the consequence that domestic orders for defence
equipment are not sufficient to achieve the wanted economies of scale.

Conflict-Free Space

Europe’s great success is, in fact, the creation of a genuinely
conflict free geographical space in a continent that has witnessed the
most inhumane and destructive wars in the past. No European country is
threatened with aggression by a neighbour. This should have argued in
favour of a massive contraction of the European defence sector.
Ironically, outside the US which maintains a gargantuan defence sector
and Russia which inherited an oversized defence manufacturing base from
the Soviet Union but which has declined considerably, individual
European countries still retain impressive defence manufacturing
capabilities. There is little relationship between the external threat
European countries face and the wherewithal they maintain to defend
themselves.

For the bigger European powers which have wielded power
internationally for a very long period and are habituated to it, and
which have fought with each other and with others in order to advance or
preserve their interests or impose their will, the possession of a
sizable defence industry is an expression of their continued big power
status. It gives credibility to their role in maintaining international
peace and security whether institutionalized in the Security Council,
within the ambit of NATO, a “coalition of the willing” or self-assumed
in the light of their national interests. Their military capabilties
give them the means to project their power outside. Besides this, the
civilian off-shoots of defence technologies are also very important as
they have a bearing on the efforts of these countries to remain in the
forefront of global-level technological innovation.

For Europe, rivalry with the US, which is both an ally and a
competitor, is a powerful reason to maintain a sizable, independent
defence manufacturing base. If, on the one hand, the trans-Atlantic
alliance in the form of NATO provides Europe with the US defence
umbrella and allows it to reduce its defence expenditure, fears of loss
of independence in foreign policy making and subservience to the US
makes the major European countries retain sizable defence capabilities.

With the lessons from the conflict in Yugoslavia in mind, these
countries also want to be able to maintain peace at least on the
periphery of Europe largely on their own rather than relying entirely on
the US for this. The French, for example, have long pushed for a common
European defence policy, but without much success because of the NATO
factor and the opposition of many European countries, especially those
from the erstwhile Soviet block, not to mention the UK, to any dilution
of the US role in European defence.

One needs to keep also in mind that while India and others deal with
individual European countries for defence cooperation and purchases, in
actual fact Europe’s defence manufacturing has become mostly
“multinational”. Much of this sector has either been privatized in
Europe or enterprises are jointly owned by governments and private
capital.

The economies of scale are sought to be obtained within Europe itself
by various countries pooling requirements and jointly funding defence
production programmes. Work is shared between countries often in
proportion to the size of the procurement orders placed by them.
Equipment manufactured by one country has in it components manufactured
in other countries, such is the nature of collaboration in defence
manufacturing today.

In view of all the acquisitions and mergers that have taken place as
part of a consolidation process the industry has undergone in the face
of high costs, competition and declining orders. Hardly any product is
now purely “national”. Even when a European product is being bought it
is likely to have US made components in it. At the level of tie-ups in
capital, the trans-national nature of major European defence
manufacturing companies is even more of a reality.

The European Aeronautics, Defence and Space company (EADS), for
example, was created in 2000 by merging French (Aerospatiale-Matra),
German (DASA) and Spanish (CASA) companies. Its missile branch was
merged with BAE systems of the UK and Finmeccanica of Italy to form the
MBDA. The Eurofighter, the other contender for our MMRCA contract, is
jointly produced by Germany (DASA), Britain (BAE), Italy (Aeritalia) and
Spain (CASA). Dassault, whose Rafale has been selected for negotiations
for the acquisition of 126 combat aircraft by India, is owned by
Dassault Group (50.55%) and EADS(46.33%), which means that even if the
Eurofighter has been excluded from the 126 aircraft competition, EADS,
the manufacturer of the Eurofighter, will financially benefit from the
Rafale deal.

Augusta Westland, which has signed a joint venture agreement with
Tata Sons to assemble its AW 119 helicopters is an Anglo-Italian
company. Turbomeca, the French aircraft engine maker is tied up with
Rolls Royce. Thales, another French company, which is involved in India
defence programmes, is tied up with Raytheon from the US and BAE from
the UK. BAE, the manufacturer of the Hawk trainer aircraft sold to
India, the Ultra Light Howitzers that India has decided to acquire
through the US FMS route and a parther in the Eurofighter, has made
several acquisitions in the US.

For historical reasons India had close defence ties with the UK for
some years after 1947, to the extent that India’s Naval Chief was a
Britisher till April 1958, with Britishers also the Air Chief till April
1954 and Army Chief till January 1949. India’s Centurion tanks,
Vampires, Canberra, Hunter and Gnat aircraft, and Leander class frigates
were of British origin. But Cold war politics, British support for
Pakistan and interference in the Kashmir issue in Pakistan’s favour, a
reluctance to strengthen India miltarily against Pakistan, inevitably
led to a dilution of the defence relationship.

Within Europe, France, whose commitment to Pakistan was not of the
same order and which was not mentally hostage to any colonial era
responsibilities towards Pakistan or the sub-continent, was an
alternative source. India acquired from France, in the 1950s itself,
Ouragan, Mystere and Alize aircraft, AMX tanks and air to surface and
anti-tank missiles. In the 1960s India went in for licensed production
of French Alouette helicopters, to which were added Lama helicopters for
high-altitude operations in the 1970s.

The biggest consequence of Cold War politics was India’s turn towards
the Soviet Union beginning in the 1960s for defence supplies and
licensed production of equipment, to the point that Russia accounts
today for almost 70% of India’s military hardware.

France, amongst all the European countries, has been seen as the most
reliable partner. It has studiously avoided imposing sanctions on India
whether because of India-Pakistan tensions or even in the wake of
India’s nuclear tests in 1998, besides being the first to establish a
strategic partnership with India, indicating clearly how it perceived
India’s role in a developing multipolar world. In the 1980s India signed
the agreement to procure Mirage aircraft from France. A $2.4 billion
deal was inked in July 2011 with Dassault Aviation and Thales to upgrade
51 of these Mirage aircraft.

The selection of Rafale for final negotiations for the MMRCA
contract, even if done strictly on the basis of technical and commercial
parameters, testifies to the underlying confidence in the stability and
security of defence ties with France.

In December 2005 India and France signed the $3 billion Scorpene
deal, opening up cooperation in an area the French were especially keen
on, in part to obtain orders for their state-owned naval shipyard, the
DCN, and, in part, to attenuate negative feelings in India about their
considerable naval cooperation with Pakistan.

The element of competition with Germany, which had supplied 4 type
209 submarines to India between 1986 and 1994, was strong. Two of these
German submarines were built in Germany and two assembled in Mazagaon
docks. In 1991, however, HDW, the manufacturers of the submarines, was
blacklisted by India, which opened up space for France to enter the
Indian submarine market.

The bagging of the Scorpene contract was a political success for
France, given that Germany had greater experience and a more established
reputation in submarine building and technology. This success was not
unconnected with the goodwill France had earned by its accommodative
position on India’s 1998 nuclear tests. The delay in implementing the
Scorpene project did cause some bickering about where the responsibility
lay, but this has been overcome.

Other projects with France include development of engines for the
ALH, the Kaveri engine for the LCA and the Shakti engine for Dhruv. A
major project involving substantial technology transfer that has been
negotiated with MBDA and awaits governmental approval is joint
development and manufacture of the SR-SAM, the short range surface to
air missile. A successful implementation of this project can open up
more cooperation in the missile field, including, potentially, ballistic
missile defence.

During the Indian Prime Minister’s visit to France in July 2009,
President Sarkozy had reportedly promised to open all doors for
Indo-French defence cooperation. The Indian decision in favour of Rafale
creates a favourable ground for India to press for implementation of
that promise. For the time being, French attention is focussed on
finalizing the Rafale contract and other major steps in defence
cooperation, especially in restricted technologies, will probably have
to wait till then.

In 1979, with India ordering around 130 aircraft Anglo-French Jaguar
aircraft, with licence production and transfer of technology as part of
the package, the British made a sizable come-back into the Indian
market. In February 2003 India ordered 66 Hawk trainer jets from Britain
worth $1.7 billion. India insisted these planes carry no US parts
because of the experience with its Harrier aircraft detained in Britain
after the imposition on nuclear sanctions on India in 1998.

In July 2010, during Prime Minister Cameron’s visit India India
placed an order for an additional 57 Hawk aircraft worth $1.1 billion to
be built by HAL, with Indian complaints about delays in transfer of
technology for the earlier contract apparently resolved. Apart from
defence sales, India and Britain have held air and naval exercises.

In the area of R&D, the tie-up between DRDO and the British DSTL
(Defence Science and Technology Lab) is of potential interest. Britain
is offering participation to India in the Global Combat Ship (GCS), a
flexible role frigate. Britain, as we know, has a very large defence
manufacturing base, the largest in Europe, with almost 2600 defence
companies. BAE systems, which have contracted to sell 140 Ultra Light
Howitzers to India, is looking at a role in artillery modernization in
India, for which it has tied up with the Mahindra Group to create a
Centre for Excellence for artillery projects.

The German Connection

Germany’s Kurt tank was involved in the manufacture of HAL’s Marut
jet fighter in the 1950s. Since 1999 Germany, which is the fifth largest
exporter of defence items to India, has been providing parts for
construction of ships and submarines, such as fire control systems,
sonar and navigation systems, parts for planes, helicopters and tanks.
Apart from supplying 4 Type 209 submarines, it has supplied a large
number of Dornier 228 aircraft. India and Germany signed a new Defence
and Security agreement in 2006; an Indo-German High Defence Committee
has been formed; visits of service chiefs have been exchanged. In 2008,
the first joint naval exercise was held off Kochi.

Of course the Germans have had their set-backs in defence deals,
having lost the submarine contract to the French and failing to win the
MMRCA contract for which they were the lead country for negotiations.
Earlier, in December 2007, they saw the cancellation of the $ 500
million 197 helicopter deal that had been won by Eurocopter. The result
of the re-tender remains uncertain because of competition from the
Russia’s Kamov helicopter. Similarly, in the first tender for 6
Refuelling Aircraft, EADS’s Airbus 330 (military version), for which the
lead country is Spain (but Germany is a big shareholder of EADS), came
out lowest in price but this tender too was cancelled in 2009 and has
been re-tendered. The competition is again with a Russian aircraft, the
IL76 with new engines, with uncertain result.

India’s defence relations with Italy are relatively limited. Italy’s
Alenia Aeronautica has 21% share in the Eurofighter, but this plane lost
out in the MMRCA race, as we know. Italy is providing consultancy to
our Navy for our indigenous aircraft carrier. Finmeccanica of Italy is
providing its propulsion system. India is obtaining heavy weight
torpedoes for its submarines and frigates from Italy. Finmeccanica’s
subsidiary Augusta Westland won the tender for supply of 12 AW101
helicopters to serve as executive transport helicopters for the Indian
VIPs. Augusta Westland has established a joint venture with Tata Sons to
assemble the 8 seat AW 119 Ke light helicopter in India. In 2003 India
and Italy renewed their 1994 MOU on defence cooperation. The India-Italy
Joint defence Committee has met once, in January 2010.

India has the dubious distinction of being the world’s largest
importer of arms. This reflects extremely poorly on the state of
indigenous defence manufacturing. That a large country like ours, with
such huge security challenges from China and Pakistan combined
aggravated by US and western arming of Pakistan and subjecting India to
technology regimes, should have been impelled to build domestic
capability on an accelerated basis. No country can follow a truly
independent policy without an independent defence base of its own. There
can be no strategic autonomy without an independent self-defence
capacity. We have not been able to leverage our large scale imports for
obtaining the level of transfers of technology needed by us.
Fortunately, the allure of the Indian market has persuaded countries
like France and Germany not to enter into any new major defence
contracts with Pakistan.

Changing Attitudes

Today the situation has improved for us. India has been liberated
from nuclear sanctions and our western partners are, in principle,
supportive of our membership of the various technology regimes set up by
them. This changed attitude towards India should progressively make it
easier for us to insist and obtain meaningful technology transfers. The
policy on offsets will contribute to building a larger defence
manufacturing base, but it would be on a sub-contractual basis and is
not likely to lead to the kind of transfers we want. For this a change
in our rules on FDI in the defence sector is required. The present 26%
ceiling needs to be increased to 49% as a first step. The private sector
should be given all encouragement to enter the defence sector.

The entry of the US in the Indian defence market and its success in
bagging contracts worth $ 9 billion in the last 5 to 6 years is
impressive. This shows that India does not think that the use of
sanctions against India is a serious threat anymore. Meanwhile,
Pakistan’s relations with the US and the West in general have seriously
deteriorated.

US has now begun to focus on the Asia-Pacific region to potentially
counter a threat from rising China. These developments are in our favour
in terms of building up our defence potential. The technology transfer
problems will not be easy to deal with as the defence sector in western
countries has been largely privatized and private companies cannot be
compelled to part with proprietary technologies. Where governments are
standing in the way through export controls that is where India needs to
exert pressure.

European countries have to contend with Russia’s entrenched position
in our defence sector, the impressive share Israel has carved out for
itself- the second largest-in this sector and the advances the US is
making. India is caught between the need to limit the inventory of
equipment it has for operational and maintenance reasons, and the need
to diversify so as not to create over-dependence on any one country.

We are expected to import $200 billion worth of arms in the next 12
years. European countries will certainly have a share of this. They
should, as European cooperation comes with much less intrusive demands
and fewer chances of disruption of supplies for extraneous reasons. And
we have tested our cooperation with European countries for long years
now.